The York Water Company — FY2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019. The York Water Company is a regulated water and wastewater utility serving York and Adams Counties, Pennsylvania. Its primary business is impounding, treating and distributing water; it also operates wastewater collection and treatment systems. The company is regulated by the Pennsylvania Public Utility Commission, including rate setting, financing and service-territory matters.
At year-end, the company served approximately 71,411 customers and an estimated population of 201,000. Average daily water consumption was approximately 20.1 million gallons versus average daily availability of 35.4 million gallons.
Financial and operating metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $51.578 million | $48.437 million | +6.5% |
| Operating income | $23.786 million | $22.517 million | +5.6% |
| Net income | $14.402 million | $13.376 million | +7.7% |
| Basic and diluted EPS | $1.11 | $1.04 | +6.7% |
| Operating expenses | $27.792 million | $25.920 million | +7.2% |
| Net cash provided by operations | $18.881 million | $18.372 million | +2.8% |
| Capital expenditures | $18.425 million | $16.882 million | +9.1% |
| Total long-term debt, including current portion and lines of credit | $104.042 million | $95.908 million | +8.5% |
| Total stockholders’ equity | $134.185 million | $126.195 million | +6.3% |
Net margin, calculated as net income divided by operating revenue, was approximately 27.9%, compared with approximately 27.6% in 2018. Return on year-end common equity was 10.7%, versus 10.6% in 2018. The effective income tax rate decreased to 13.5% from 15.7%, primarily because of deductions under the IRS tangible property regulations.
Operating revenue growth was driven mainly by a PPUC-approved rate increase effective March 1, 2019, tax-related rate effects and customer growth. These benefits were partly offset by a $1.722 million decline in Distribution System Improvement Charge revenue after the DSIC reset to zero when new base rates became effective.
Operating expenses increased primarily due to higher depreciation, wages, distribution-system maintenance, technology upgrades, purchased power, rate-case expense and water-treatment maintenance. Interest on debt declined to $5.124 million from $5.509 million following debt refinancing.
Cash and cash equivalents were only $2,000 at year-end because the company uses a cash-management account linked to its credit facilities. It had $7.672 million outstanding under lines of credit and $41.5 million of aggregate unsecured credit commitments. Debt represented 43.7% of total capitalization, compared with 43.2% in 2018. Standard & Poor’s affirmed an A- rating with a stable outlook.
Material changes versus the prior comparable period
- Operating revenue increased $3.141 million, while net income increased $1.026 million.
- Average water customers increased by 556 and average wastewater customers increased by 228. Year-end customers increased to 71,411 from 70,263.
- Average daily water consumption increased to 20.157 million gallons from 19.517 million gallons, although per-capita consumption declined approximately 0.6%.
- The company completed the $2.112 million acquisition of the Jacobus Borough Sewer Authority wastewater collection assets, adding approximately 700 wastewater customers. Management considered the acquisition immaterial to results.
- The company issued $20 million of 4.54% senior notes due 2049, $15 million of 3.23% senior notes due 2040, and approximately $25.37 million of 3.00% to 3.10% refunding bonds. Proceeds primarily refinanced higher-cost debt and certain credit-line borrowings.
- Utility plant increased to $401.383 million from $380.784 million, reflecting ongoing infrastructure investment and dam improvements.
- The defined benefit pension plans moved from an $887,000 underfunded status at year-end 2018 to a $1.819 million funded status at year-end 2019, primarily because of investment returns, despite a lower discount rate.
Guidance, outlook, risks and unusual items
Management expects 2020 revenue to increase modestly because of a full year at the new rates and continued customer growth and acquisitions. It expects depreciation and other operating costs to rise as investment in utility plant and system maintenance continues. Management also expects 2020 interest expense to be slightly lower, subject to additional line-of-credit borrowings and refinancing effects.
Planned construction and acquisition expenditures are approximately $29.5 million for 2020 and $27.0 million for 2021, excluding acquisitions not yet approved. Planned projects include routine infrastructure replacement, main extensions, spillway improvements, dam armoring, raw-water pumping-station improvements and wastewater treatment expansion. Funding is expected to come primarily from internally generated cash, with additional funding from credit lines, stock plans and customer contributions; potential debt or equity offerings may be used if needed.
- The company expects to finalize dam-armoring plans in 2020 and begin armoring one dam in 2021. Estimated cost is approximately $5.5 million per dam.
- Several wastewater acquisitions and a Dallastown-Yoe Water Authority interconnection remain subject to regulatory approval and are expected to close or become effective in 2020. Management expects the acquisitions to be immaterial to results.
- Revenue remains sensitive to weather, rainfall, drought restrictions, conservation, customer usage, economic activity and customer growth. Rate relief from the PPUC is important to recovering operating and capital costs.
- LIBOR-based credit facilities and the interest-rate swap may be affected by the anticipated discontinuation or modification of LIBOR after 2021. The successor rate and financial impact were not determinable at filing.
- The company’s interest-rate swap had a $2.248 million fair-value liability at year-end. A credit-rating decline below BBB- could trigger an approximately $2.307 million payment obligation under the swap provisions.
- The company completed replacement of all known company-owned lead service lines. Customer-owned lead-line replacement costs are recorded as a regulatory asset and are estimated at approximately $1.3 million, subject to adjustment.
- Approximately 31% of full-time employees were covered by a union contract expiring April 30, 2020. Management expected negotiations to result in no service interruption.
- Cybersecurity incidents could disrupt billing, operations, treatment facilities and financial reporting, although the company reported no material impact from such attacks through the filing date.
- The company increased its quarterly dividend by 3.98% during the fourth quarter, from $0.1733 to $0.1802 per share. The 2019 dividend payout ratio was 63.1% of net income.
Important facts for investors to verify
- Confirm the effective revenue contribution and ongoing regulatory treatment of the March 2019 rate order, including the temporary negative surcharge returning tax benefits to customers.
- Monitor the renewal or refinancing of credit facilities, the $6.5 million 2020 debt maturity and the potential $12 million exposure associated with the variable-rate bonds if they cannot be remarketed or supported by a renewed letter of credit.
- Assess whether the planned $29.5 million of 2020 capital spending can be funded without materially increasing leverage or requiring equity issuance.
- Track PPUC approval and timing for the pending wastewater acquisitions and Dallastown-Yoe interconnection.
- Evaluate the effect of weather, drought restrictions and declining per-capita consumption on water usage and revenue.
- Review regulatory-asset recovery, tax-related regulatory liabilities, pension assumptions and the company’s ability to recover future costs through rates.
- Verify the transition mechanism for LIBOR-based debt and the potential effect on borrowing costs after 2021.